My question: can mythtv hold and play back my DVD and C library and act as a digital entertainment center? And could it also play my netflixed dvd's?

I would like to transfer my all my DVD's and music cd's to a digital center and then use that digital center to play my entertainment stuff. This would allow me to finally box up my CD's and DVD's and store them, and then just tend to one unit in the house.

I'm knew to MythTV so I don't know if this is the software solution I'm looking for. I don't watch tv through cable, I either torrent my shows, or watch them from ITunes or Hulu, so this wouldn't at all be for streaming tv.

Short answer: yes
Longer answer: http://mythtv.org/modules.php?name=MythFeatures